Why Americans Pointlessly Pay Up for Brand-Name Drugs

The rich aren't like you and me. They have more money to blow on overpriced aspirin.

The willingness of shoppers to shell out for brand names when they could save money buying generic may be one of the great testimonies to the power of advertising over ill-informed consumers. But beyond that, it appears to be a particularly bad habit of the well-to-do. So suggests a new paper by researchers from the University of Chicago's Booth School of Business and Tilburg University. It concludes that when it comes to products like over-the-counter drugs like aspirin, or pantry staples like sugar or baking soda, which are virtually identical to their generic competitors, consumers are indeed more likely to pay up for a brand name if they're poorly educated about what they're buying. However, shoppers also appear more likely to spend on a famous label if they have the income not to worry about it.

Take pharmaceuticals. The aspirin sold by Bayer is essentially the same as the private label versions carried at your local CVS or Walgreens. The big difference: Bayer's costs about three times more. And yet, the paper notes that according Nielsen data, brand name drugs still account for 21 percent of daytime headache medication sales in the U.S. by volume, and nearly half by dollar value.

So who's choosing to pay more for the name on the box? Largely, it's people who just don't know any better. The researchers surveyed more than 80,000 shoppers, asking them to identify the active ingredient in five leading pain relievers, Advil, Aleve, Bayer, Excedrin and Tylenol. Those who could name all five correctly bought more than 80 percent generic. Those who couldn't name any correctly bought less than 60 percent generic. Doctors, nurses, pharmacists, and health professionals were particularly keen to save on private label versions.

Ignoring what consumers knew, though, a clear pattern emerged. Generally, wealthier households were more apt to pay for the Tylenol they'd probably seen on TV, rather than boring old acetomenaphin in a CVS box. Just take a look below.

A similar pattern emerged when it came to grocery shopping. Food industry workers like chefs were happy to buy up store-brand sugar, salt, and baking soda, while wealthier shoppers in other occupations were less so.

So it appears that once consumers don't have to watch their weekly budgets like a hawk, they start missing easy chances to save money. The paper suggests that better informed consumers could reasonably save more than a billion dollars a year buying generic products that are roughly identical to brand versions.